WHAT HAPPENED TO MY APPLE?
WHAT HAPPENED TO MY APPLE? A Straight Talk, No B.S. Guide to Retirement for Teachers GIANNA CAMPO and Ed Orell
iv What Happened to My Apple? A Straight Talk, No B.S. Guide to Retirement for Teachers Copyright © 2020 Gianna Campo and Ed Orell BMD Publishing All Rights Reserved ISBN # 979 8583600472 BMD Publishing CEO: Seth Greene Editorial Management: Bruce Corris Cover Art & Layout: Kristin Watt BMDPublishing@MarketDominationLLC.com MarketDominationLLC.com Sale of this book without a front cover may be unauthorized. If this book is coverless, it may have been reported to the publisher as “unsold or destroyed” and neither the author nor the publisher has received payment for it. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Publisher. Requests to the Publisher for permission should be sent to BMD Publishing, 5888 Main Street, Suite 100, Williamsville, NY 14221. Printed in the United States of America
v PREFACE As we put the finishing touches on What Happened to my Apple? in August of 2020, teachers throughout the country were dealing with the overwhelming challenge of the pandemic, and for many that meant having to go back to work in an environment that no longer felt safe. It meant potentially risking their lives for their jobs, and, at the very least, it meant returning to a workplace that was wholly different from the one they had left just a few months earlier. Today, at least two in five teachers over 60 that we speak to confide in us that they are considering retiring as soon as possible. Many people we've spoken to have already turned in their resignations. For what it's worth, we would like to offer our most sincere apologies if you currently find yourself in an impossible situation and feel as if your needs are not being met and your voice is not being heard. We hear you. We see you. We thank you. ~ Gianna Campo & Ed Orell
INTRODUCTION My name is Gianna Campo, and this is a book about Retirement Planning. Don't fall asleep! I promise, it's not that kind of book. It's a book about you. But, first, let's get who I am and why I'm writing to you out of the way. I'm a financial advisor, and along with my partner Ed Orell and our growing team, we have worked almost exclusively with people in education for a number of years. From principals to paraprofessionals, AC repair guys to superintendents, but mostly, with teachers. And guess what? Teachers rule! I'm honored to be able to work daily with you, who play such an important role in the fabric of our communities, and help you understand your retirement benefits.
Every single day I ask someone the question, “In your dream scenario when would you like to retire?” and hear them say, “tomorrow.” And then, maybe out of guilt, they will qualify the answer, “I mean, I love teaching. I LOVE the kids! It ’ s just all of this other stuff. The testing, the parents, the technology, the attention spans, everything has changed…and I ’ m tired.” I respond, with utmost sincerity, “I hear you. I can ’t imagine doing what you do for 30 minutes, let alone 30 years. Let ’ s figure out what ’ s going on and how I can help.” You had a dream to educate young minds. It was born out of a love for learning and a passion for sharing your gifts with others. Or maybe it was a practical decision, your mother or your
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viii favorite aunt was a teacher, and they were happy. Weren ’t they? It was supposed to be a good career. It was supposed to be the smart choice, and you are the kind of person who makes smart choices.
Over the years you probably haven ’t gotten the raises that you were contractually promised, you may have been asked to contribute to your own pension plans, the cost for your benefits has continued to increase, but you feel you have to work until 65 or you will go broke paying for your health insurance, and your job description completely changed. You were always a teacher, but now you are also expected to play the role of a social worker, a parent, and a constant collector of kids ’cell phones. You give the better part of your lives to the job and in recent years, you have been asked to potentially give your actual lives for the job. And you love your kids. But what ’ s in it for you? Where is the monetary appreciation? Where ’ s the hazard pay? At the very least, weren ’t they supposed to bring you apples??? Disclaimer*. I sell financial products. But I ’ m not writing this book to sell a specific financial product to you. I would be thrilled if you read this book and sought help from our firm. I will be equally happy, though, if you read it and feel a little more empowered about your situation. I hope to give you enough information that you will be able to get a decent handle on where you might be today. My intent is to have you feeling a little more like you ’ re in the driver ’ s seat and a little less like somebody stuck you in their trunk. So, let’s get started!
ix Gianna Campo & Ed Orell January 2021
xi TABLE OF CONTENTS PREFACE ..................................................................................................... x INTRODUCTION...................................................................................... ix CHAPTER 1: Primary Retirement Plans ........................................ 1 CHAPTER 2: Voluntary Retirement Plans ................................. 15 CHAPTER 3: Mutual Funds ............................................................. 25 CHAPTER 4: Annuities ....................................................................... 31 CHAPTER 5: Risk .................................................................................. 45 CHAPTER 6: Observations & Opinions ....................................... 47 CHAPTER 7: When You Can Get Out of Dodge ........................ 53 CHAPTER 8: Who Pays You? .......................................................... 61 CHAPTER 9: A Note About Everything I Left Out ................... 63
1 CHAPTER 1
If you are reading this and you just said, “Hey, that ’ s me!” please, take a deep breath. None of this is quantum physics. (I actually do have a client who said all of those things to me who teaches, no joke, quantum physics.) You are not alone, and you ARE up to the task. We ’ re going to break this down, together, and you ’ re going to “get it” for the first time. And I ’ m going to give you a massive long distance high five, an A+, and a shiny new apple.
Before we go on though, why is all of this so confusing?
I speak to about five or six new public employees daily, three of whom will bashfully confess that they are “really bad at this stuff” and say things like, “I know nothing about money” and “I feel so embarrassed that I don ’t understand my pension.”
Through this book I ’ m going to explain these things and I sincerely apologize if my explanations are oversimplified. I promise I am neither intentionally nor unintentionally being condescending. It ’ s just crazy important that I speak to everyone, regardless of their level of knowledge on the subject. For the record, I think most of my clients are way more capable than they think they are. Give yourself permission to say, “I think I get this!”
Primary Retirement Plans
GIANNA CAMPO & ED ORELL 2
One of the culprits is time. Your pensions and other primary retirement plans aren ’t that complicated. Your state ’ s pension website has a ton of useful info on it and the customer service reps and planners on the phones are extremely well informed and helpful. However, those pension system reps aren ’t exactly coming to you, so if you want to figure this stuff out, you need to seek the information out for yourself. But, many of you don ’t even know what questions to ask, and you don ’t have five minutes to pee let alone an hour plus to wait on hold and have someone explain step-by-step how your retirement works.
We ’ re going to take you through that in a way that won’t take a lot of your time. You likely have a Primary Retirement Plan, which might be either a Pension Plan or some other type of Qualified Retirement Plan, and it ’ s supposed to be the backbone of your retirement.
Vesting You always own the contributions you made to your retirement plan. Vesting is the amount of time you have to work for an employer until you own the contributions that the
When you were hired, your employer likely set up a retirement plan for you, and you might contribute to it as well. Most pensions require mandatory employee contributions, and other qualified retirement plans typically provide you with an employee match only if you also make your own contributions. This money usually goes into one of two types of plans, Defined Benefit or Defined Contribution, and sometimes a combination of both.
employer made on your behalf. The question “Am I vested?” means, “Am I entitled to receive all of the retirement benefits in this plan?” “What is the vesting period?” means, “How many years do I have to work before I am entitled to receive all of the benefits in this plan?”
HAPPENED
Quick Overview
Two types of Primary Retirement Plans:
1. A Defined Benefit Pension Plan-
This is an agreement between you and your employer, that if you work for a certain length of time and/or you are a certain age, you will earn a monthly payment from that employer for the rest of your life. It ’ s called a Defined Benefit Pension Plan because it is defined not by how much money went into the plan in the first place, but by the benefit you will receive from it each year over the course of your lifetime. From now on we ’ re just going to call it a pension. Now, the payments you will receive from the pension system will usually be significantly less than what you were making while you were working, but you should still be able to depend on this direct deposit or check on a monthly basis forever, because you earned it. Man did you earn it. It ’ s important to note here that pension payments and the guarantees provided by a pension system are only as good as the pension system that is making them, as many states, companies, cities, etc. have underfunded pensions.
WHAT TO MY APPLE? 3
There is no one formula for determining what a pension will be. Pensions vary depending on what state you are in and who your employer is. Some states, like Florida, have one large State Pension System that applies to many people who work for the state: teachers, firefighters, police officers, correctional officers, and elected officials. Texas has a pension that is just for school employees. Teachers ’pensions in TX are larger than teachers ’ pensions in Florida, but in TX teachers do not pay into Social Security. My point is: they are all different.
To simplify this even more:
GIANNA CAMPO & ED ORELL 4
Cost of Living Adjustment, COLA- is an increase in the amount of money a person receives annually to keep up with inflation. This is something you may receive in your normal pay while working and something that, we hope, applied to your pension benefits.
Pension = Monthly Check
I’ll be frank, pensions are not what they used to be, and they are getting worse not better. Your grandparents and mine had better pensions than you do and I ’ m sure it never even crossed their minds to question their benefits, because they knew they would always be there. Today, sadly, things have changed. Pensions have massive commitments (in the trillions) and many of them are underfunded to some degree. In order to keep their promises to retirees they frequently ask working people to contribute more out of their own paychecks or reduce members ’ Cost of Living Adjustments.
I ’ m a huge fan of all period piece drama and one of the shows I recently re watched in its entirety was Mad Men. When I watch a show like that and they mention money, ex: Don gives his estranged brother an envelope with $4,000 in it. I immediately google: $4,000 in 1960, and I see that today that would be worth $34,647. Mind Blown. Now, 60 years is a long time, but let ’ s consider half of that time, $4,000 in 1960 would be worth $17,662 in 1990. That ’ s 30 years.
Cons
having a
WHAT HAPPENED TO MY APPLE? 5
Pros: • You get a check every month until you die • You might have some sort of cost of living adjustment on your pension. • You might have a survivorship option for a spouse if you die prematurely, but you usually have to choose it before retiring. • You can usually take a pension after a certain number of years of service regardless of how old you are. Ex: many teachers start working in their early twenties and are able to start taking a pension in their early to mid fifties without penalties, where lump sum money is subject to penalties if you are under the age of 59.5 or 55 if fully retired.
Pros
Many of the people I work with have their hearts set on retiring at 62 and these same people might very well live into their nineties. Bottom line, 30 years is a long time and the buying power of money is something that you cannot ignore when planning for retirement. and of Pension:
GIANNA CAMPO & ED ORELL 6 Cons: • The survivorship options, especially for non spouse beneficiaries like your kids, aren’t always the best. • Unless you have an option that allows you to get a lump sum of money, some states call it DROP or PLOP, LOL, your pension doesn’t have any liquid cash value. You can’t ask for an advance on next year’s pension if you have an emergency. According to the Social Security Fact Sheet from December 2019, “49% of the workforce in private industry has no private pension coverage”. https://www.ssa.gov/news/press/factsheets/basicfact alt.pdf 2. Defined Contribution Plan If 49% or less of the country does not have a pension, then what do they have? Sadly, some have no retirement at all. But a good portion of workers in this country have what’s called a Defined Contribution Plan, which is defined by the contributions made to it (money paid in) and any gain or loss that money experiences based on the underlying investments inside the plan. If you or your spouse have ever worked for a private company, this plan would most likely be a 401(k). If you work for a public school, private school, or university, it’s most likely a 401(a) or a 403(b), maybe even a 457(b), or they could call it an ORP which is often a 403(b) with a fancy name. For the purpose of this discussion those tax codes mean nothing. It ’ s a Defined Contribution Plan but we ’ re going to call it a Qualified Retirement Plan.
WHAT HAPPENED TO MY APPLE? 7 The pros and cons of a Qualified Retirement Plan are: Pros: • Your plan is liquid once you retire. You can use the money however you want, remembering that you do have to pay taxes on it when you start using the money. • You have more choices about how your money is invested. After you retire, you can take your money to whichever advisor or investment platform you want, or you can manage it yourself. • Typically, there are more survivorship options for non-spouse beneficiaries like kids. • Your plan is portable. If you switch jobs often or don’t plan on being at your job for a long time, this may be a better choice for you than a pension, which usually has longer vesting requirements. Cons: • You have to pay yourself out of the plan for the rest of your life—you have to make this last FOREVER. • Since you have to pay yourself for a lifetime and have no idea how long that will be, you may not really know how much you can afford to pay yourself. • You have to either manage the investments for yourself or choose someone to do it for you. • In most cases there are restrictions on when you can use your money without IRS tax penalty, so if you are younger than the plan allows, accessing your money might cost you an additional 10% penalty.
GIANNA CAMPO & ED ORELL 8 To simplify even more: Defined Contribution Plan = Lump Sum Now Stop
Take a minute and figure out what type of Primary Retirement Plan you have. Do you have a Pension Plan or a Qualified Retirement Plan? If you have no idea which type of plan you have and would like some assistance figuring that out, you can contact your state or school ’ s pension system. Ask them what type of plan you are in
Tip: Call pension systems early in the day, it will be easier to get through and you may not wait on hold as long.
With both plans we ’ re going to discuss, neither you, nor your employer has paid any taxes on this money yet. So, when you take money out in retirement, you have to pay taxes on it. Sorry, no getting around that, really.
WHAT HAPPENED TO MY APPLE? 9 and what your benefits will be when you retire. If you ’ ve moved around a lot and have service in a bunch of different states and schools, it ’ s going to be more complicated. I often refer to this as a Retirement Treasure Hunt. Either way, the representatives on the phone are there to help you, do not feel shy or embarrassed about trying to track down six years of service you did in Virginia 25 years ago. If you have vested retirement benefits, you are entitled to them.
Paying Taxes
GIANNA CAMPO & ED ORELL 10 Social Security I’m not going to go into the solvency of Social Security, not even a little bit. That’s not what this book is about. My point with bringing up Social Security is that the people I work with who are retiring when they are old enough to take full Social Security, or close to it, are in a far better position than those retiring earlier. This may seem obvious, but it’s worth mentioning. Many teachers start teaching in their early twenties and they want to be finished teaching in their mid fifties, but unlike firefighters and police officers (whose pensions often cover 75% or more of their working salary) teachers’ pensions are usually far less generous. The earliest age a person can start receiving Social Security benefits (not disability) is currently 62, and the magical age one can enroll in Medicare is currently 65. A teacher retiring before he meets these benchmark ages, might find himself position where it’s hard to make ends meet. Survivorship I want to talk briefly about survivorship on a pension but since the rules differ vastly depending on where you live, we won’t be here for long. If you are married, there are usually options where you can choose to take a smaller percentage on your pension for your lifetime with the stipulation that if you were to die before your spouse, your pension would continue for the rest of his or her lifetime. This option isn’t currently available for domestic partnerships, at least not in my home state.
Another Possible Solution
It’s a pretty common practice, and it’s not a bad idea, to not take the survivorship option on a pension and use all or part of the
WHAT HAPPENED TO MY APPLE? 11 In “Susan’s” hypothetical case, to choose a survivorship option for her spouse would be about a 20% reduction in her monthly benefit, so instead of Susan’s pension being $2,900 a month it would be $2,300 a month if she chooses the survivorship option. But if she were to pass away the pension would continue on for her husband or wife. That’s almost $600 per month that Susan is, essentially, leaving with the state in order to have this protection. Is it worth it? Maybe?? It really depends on how long Susan lives. Let’s just say, I’ve seen it both ways. Several times in my career I’ve experienced a client choosing an option without survivorship only to pass away after taking only a few pension checks, leaving their spouse (who really could have used the pension) SOL. I’ve also seen people living on a pension from a deceased spouse and that’s a really nice gift someone can leave behind. Money isn’t everything, but money makes life a lot easier, especially when you are on your own. I can’t make this decision for you and I’m even wary to make suggestions on this point. I can help weigh the pros and cons, but this truly is a personal decision that really needs to be made between two people in light of estimated financial need for both parties. Life Insurance
GIANNA CAMPO & ED ORELL 12 difference between the two pension amounts to purchase a life insurance policy that would protect the surviving spouse in case the primary pension owner passes away prematurely. It’s an excellent idea! But it’s not an idea without flaws or potential potholes. The most obvious being, life insurance, especially permanent (or “cash value”) insurance can be expensive and gets more expensive every year that you wait to buy it. And in most cases, you have to be healthy enough to qualify for it. So, while this is an excellent idea in theory, it’s an idea that usually works better when executed many years in advance of retirement, not on the day you fill out your exit papers. If you are 65 and looking to purchase a permanent life insurance policy for $500,000 it might cost anywhere from $500-$800 a month while the same coverage might cost between $300 $500 if you made the decision ten years earlier far in advance of having to pull the trigger on the survivorship question. Side note: There are some excellent polices out there that have optional riders built into them that you can purchase to cover long term care, critical illness, chronic illness, and even disability. I mention this for a few reasons, the first is because I often see teachers’ paychecks listing payments for cancer, critical illness, accident etc. I want you to know that in most cases these types of coverages can be purchased elsewhere for more coverage and less out of pocket. The major benefit to the supplemental benefits that you might be paying for out of your check is just that, the convenience of having it come out of your check. And that you are probably just too busy to research these
WHAT HAPPENED TO MY APPLE? 13 policies and strategies on your own. You really should have someone who knows what they are doing help you put a holistic plan together that addresses all your current and anticipated needs, as far in advance as possible. You should generally not cancel coverage before new coverage is in place and you should always be careful when replacing a policy that you’ve have had for a long time. We are here to help, e mail info@presfinancial.com or call 877-216-9573. Before we go on, I need you to go pull up on a computer screen, or better, print out a current paycheck. I want you to look for life insurance, cancer policies, critical illness policies, hospital indemnity policies, and disability policies. We’ll limit it to things that you are paying more than $10 per check to make things easier. Highlight them, and when you get time on your own or
GIANNA CAMPO & ED ORELL 14 with our help, I’d like you to call the individual companies and ask about your coverage. Now, don’t put the check away! It’s your ticket to enter The 403(b) “Circus”.
15 CHAPTER 2 Voluntary Retirement Plans You are now entering The 403(b) “Circus” The year was 1961. John Fitzgerald Kennedy became the 35th President of the United States, and IRS code 403(b) was extended to employees of public education institutions including colleges and universities. What that meant for you is that you were allowed to save a portion of your own check into a tax deferred vehicle for your
GIANNA CAMPO & ED ORELL 16 own use in retirement. Where earlier I spoke about a 403(b) being your Primary Retirement Plan, now I’m talking about a plan that just you contribute to, voluntarily. Now look at your ticket to the circus, I mean paystub. Is there money going into a voluntary 403(b)? If so, great! Bravo! I’m about to go on a multi page rant about the flaws in the 403(b) system but the truth is, I would rather you save money in a paper bag than not save any money at all. You should be proud of yourself, because saving is hard. But think back if you can, how did that 403(b) happen? We ask people this question every day and the answer we get 95% of the time is, “I don’t know, I guess they (403(b) salesmen) were just here.” Remember a few pages ago when I asked, “why is this all so confusing?” The first answer was time, most people simply don’t have enough time to research their pension, investment plan, or 403(b) options. Secondly, you don’t always know which questions to ask. Third, and maybe the biggest culprit of all, is that you have financial salespeople in and out of your schools all day long, selling 403(b)s, selling 457s, selling Life Insurance, selling Auto Insurance, giving out donuts, giving out sandwiches, and giving out “free” financial advice. Most of this “free” advice is not actually free and it’s also directly contradictory to the advice you got from the person who was in here last month, leaving you more confused than you were before you sat down, and knowing only one thing for sure: you don’t know who to trust. You don’t know who has the better plan, and you don’t have time to research all of this yourself.
WHAT HAPPENED TO MY APPLE? 17
It usually goes something like this… 25 years ago, there was a flyer saying a guy named Cliff would be sitting in the breakroom all day handing out donuts and talking about retirement. You saw that flyer. You don ’t remember what company he was from or anything else really, you just remember that you had 45 seconds before the next 25 five year olds would be marching into your room. Oh, and somehow you got purple dry erase marker inside your mouth. You promised, nay, SWORE to yourself that IF you didn ’t forget, you were going to sit down with that Cliff guy at lunch. And you did! Gold STAR! You had exactly 9.5 minutes for lunch and you were eating a hot pocket and drinking a diet coke but you distinctly remember Cliff telling you that you needed to save for retirement, asking if you were conservative or aggressive (whatever that means), asking how much you could set aside “without taking food off the table”, and sliding some papers in front of you to sign. Voila! You were the proud owner of a brand spanking new 403(b). You were going to be totally set for retirement. You ’d be a friggin ’millionaire five times over by 62. Boom. But you never saw Cliff again. Then this older woman named Mary came in about 15 years ago. She showed you all the ways the plan Cliff put you in was bad, you weren ’t making any money at all! So, Mary put you in a new plan, and she was around for a few years but then she disappeared (maybe she died?). Then Jack came in. Jack was abnormally good looking, so everyone in the school wanted to sit down with him just to stare into those
You had a 403(b) with a company for about 15 years, and then for no reason at all, without telling you, you no longer had contributions coming out of your check. It took you about three years to notice it. You were still getting statements and your money was still growing but not as much. You never thought to question it because, “who looks at their paystub?”. Then, one day, you did look at your paystub and you were like, “What the heck? When did I stop contributing to retirement??” Then again, it could have happened like this…
GIANNA CAMPO & ED ORELL 18 bottomless baby blues. According to Jack, that plan Mary put you in was loaded with fees. So, you moved all your money to Jack, but you aren ’t sure what company he was with, what he put you in, and now it ’ s been a while since you ’ ve seen him too. Sometimes, it goes like this… Lisa is the 403(b) Lady at your school. She’s been there for twenty something years. Everyone there works with Lisa on their retirement. She’s nice and she comes to the school every few weeks. Recently though, you’ve noticed that your husband’s 401(k) balance is almost double yours, and you both put about the same amount in every month. So, you’ve started to wonder, “Is my 403(b) any good?” You want to know, but you don’t want to upset Lisa. It would be like a divorce to break up with Lisa, you would definitely have to hide in the bathroom when she came to school. Or, maybe, it happened like this…
WHAT HAPPENED TO MY APPLE? 19 You’ve moved around a lot. You worked in South Carolina, Tennessee, Pennsylvania, and even Kentucky briefly. You get statements from six different companies. It’s so confusing. Some of them are 403(b)s, one is a 457, you think, and one is a 401(k). Plus, Kentucky says you have a cash balance in their pension system that you have to do something with because you weren’t vested. You have no idea what any of that means. If any of that sounded familiar it’s because we hear variations on the same story every single day enough that it was important enough for me to write a book about it. The biggest problem with “The 403(b) Circus”, as I see it, is not only the constant revolving clown car of 403(b) reps that most people will encounter over a 20 30 year period working in the education space, which would confuse anyone. It’s also that most of these reps will come into your schools selling one particular plan. They will likely give you a biased opinion about your current plan (if you have one), then they will probably exaggerate all the positive aspects of the plan they are selling while completely skirting over any negative aspects of that plan. On the flip side, if your principal or school promotes one particular rep or company (they may do this because they like and trust one particular individual), in my experience, they are often unintentionally promoting the sale of a product that they generally do not understand. They have wonderful intentions, and I applaud them for trying their best to protect you, but One Size Fits All doesn’t work for shoes or underwear, so it doesn’t really work for 403(b)s either.
GIANNA CAMPO & ED ORELL 20 Both of these situations create an environment where decision making is purely subjective and based on opinions (yours, your rep’s, or your principal’s), and not an objective decision making that would be based on you having all the information, weighing pros and cons, and making a decision based on fact. Another massive issue is that a lot of the plans that people are investing their hard earned money into are really not great plans, in my opinion. Tony Robbins is a self development giant. In the past several years he’s written two books on finance and investing. Money Master the Game and Unshakeable, and I think they are both excellent. Unshakeable is a little shorter and more digestible. The primary focus of the book is understanding investments and he talks a lot about the non so subtle ways people are often ripped off by advisors and institutions. This quote about 403(b)s is particularly chilling: “Sadly, teachers, nurses, and nonprofit employees are most vulnerable to this huge skimming operation. This is because their 403(b) plans their equivalent of a 401(k) aren’t covered under the same ERISA (Employee Retirement Income Security Act of 1974) laws that are (at least in theory) designed to protect employees. It makes me sick to think that those who sacrifice the most to make our society better are being screwed by brokers who somehow manage to sleep at night—probably on 2,000 thread count sheets. In a New York Times article titled “Think Your Retirement Plan is Bad? Talk to a Teacher,” reporter Tara Siegel Bernard does a
WHAT HAPPENED TO MY APPLE? 21 brilliant job exposing how these poor folks are mugged. In one of the most ghastly scenarios imaginable, “The teachers were each charged a fee of at least 2% of their savings to manage the money, in addition to sales charges of up to 6% each time they made a deposit…Moreover, the calculations didn’t include the expenses of the dozens of mutual funds they were invested in, some of which exceeded 1%.” That’s 9% in first-year expenses alone. That’s not a hole in your boat. That’s the whole back of the boat ripped off and dragging in the water. https://www.nytimes.com/2016/10/23/your money/403 b retirement plans fees teachers.html I’m with Tony Robbins, this situation makes me really angry. But what makes me angrier is that it’s almost impossible to figure out what clients are actually being charged in their accounts. Why? Because they have what I call “cloak-and-dagger” names for things, and it can be hard to find out what they are. And the $15 an hour rep that’s answering the phone might not really know what they are. One time I called a local broker that is a pretty big player in my home district and asked them to send me a complete breakdown of all of their fees. They faxed me an 80 page document. I’m not exaggerating. EIGHTY pages. On the flip side some of the “safer” and “cheaper” 403(b) plans might have really limited growth potential. The last issue, that I’m almost afraid to mention, is that there have been a number of instances of companies making massive
But first, if you are working with someone who you truly believe your money, and you are allowed to know all of the facts.
The other day I was talking to a mentor of mine about something I didn’t want to think about, and I said to her, “I’ve just been sweeping that under the rug.” She responded immediately and frankly, “Great, now you’ll have all the same problems and a lumpy rug.” And, you know what? She was right. Thinking about investments, money, retirement and the future in general can be really scary. It can bring up some of our insecurities. I already told you this, but I hear, “I don’t understand money and I don’t understand my pension,” at least once per day. But you have to trust me on this. Sweeping it under the rug is not going to help
understands your situation, and you trust them, I’m not here to say they are intentionally or unintentionally ripping you off or giving you bad advice. At the end of the day though, it is
GIANNA CAMPO & ED ORELL 22 donations to unions across the country which I believe help to create a semi monopoly of one company being represented over all the others in a particular district. Don’t believe me? Google, “403b companies pay off unions”. Okay, enough of my rant. I’d rather be part of the solution than be part of the problem. So, I’m going to do my best to give you just enough info to start making objective decisions and hopefully not too much that your eyes roll back in your head or you tune me out completely.
Sweeping it Under the Rug
WHAT HAPPENED TO MY APPLE? 23 the situation, if anything, it might put you in a situation that could have been fixed if it was attended to earlier. So, we’re going to lift up that rug and give it a shake. I promise you, there’s no fire breathing dragon under there, maybe just some dead spiders and a lazy ass cat. But first a quiz: What do you think is the best, most fool proof way to make sure you have enough money in retirement? A. Pick really good investments B. Win the lottery C. Have a relative leave you a lot of money in their will D. Start saving early and save as much as you can What’s your answer? Any of these options would do the trick, really. But D is the only one that is in your control. And maybe not even D. You might be a little bit older and not able to go back in time and start saving early, still, you can always save “as much as you can”, because that number is individual to you. Bottom line: if you want or need a specific amount of money set aside to make you feel comfortable in retirement, you need to save that amount of money, or at least a good portion of it. Interest that you earn will inevitably get you part of the way there, but the saving part is up to you.
GIANNA CAMPO & ED ORELL 24 403(b) Basics and What’s on The Menu? If your money is in a 403(b) through your district or school, you are limited to the investment options within your employer’s plan. At our company we’ve nicknamed your employer’s list “The Menu”. Some districts have a Menu that is like the Cheesecake Factory and some districts have a Menu that has one “daily special” and that’s it, take it or leave it. The point of The Menu analogy is that you have to eat off the Menu if you want to participate in your employer’s plan. To simplify, even though it may seem like you have a lot of choices on your menu, in reality 403(b)s can only be funded with two types of financial products, that’s it. You might have a bunch of companies on your Menu, but a lot of them are selling name brand versions of pretty much the same thing. In the end you only have two types of products to choose from. • Mutual Fund Accounts • Annuities To confuse you just a little bit more, when 403(b)s were originally created they could only be annuities, so they are also called Tax Sheltered Annuities or TSAs. Just because you have a Tax Sheltered Annuity does not mean you have an annuity. You might, but you might also have a Mutual Fund Account. I’m going to start by trying to explain Mutual Funds first, because this info will be helpful in understanding annuities as well.
Bonds are a way of owning a company, government, or municipality’s debt. HUH?
While stocks have market risk, bonds have interest rate risk. If you own a bond that is paying 2% in interest annually and new bonds come out paying 3% annually, the value of the bond you bought goes down. Conversely, if new bonds come out paying 1% the value of your bond goes up.
Stock- A stock is a type of investment that represents an ownership share in a company. Investors buy stocks that they think will go up in value over time.
Mutual Funds
If you were to borrow money from a bank to buy a car, you would pay the bank back monthly payments that equal some principal and some interest. The same is true with bonds but this time you are the lender, and the one paying you back is the company, government, etc.
Most people know what stock is, even if it’s just from hearing other people say, “Man, I wish I had bought Apple twenty years ago.” Stock is just that, when you own stock you own a piece of a company. The more stock you own in a particular company, the larger share of that company you own.
25 CHAPTER 3
Mutual Funds are a way for investors to pool their money together and purchase not one stock or bond but a collection of stocks, bonds, money markets and other securities. So instead of owning one stock, one bond, or one money market account, you, together with millions of other investors own a “collection” of different stocks, bonds, money markets, or a combination of them all.
GIANNA CAMPO & ED ORELL 26
If you look at your 403(b) statement, you might see names for different mutual funds on it and they may have names like ABCD, EFG, IJK. If you have a statement that has these types of letters on it, there is a good chance you have mutual funds in your 403(b). At any moment you could plug those letters (called a ticker symbol) into an internet browser and see how that fund is performing at any time. You can also, usually, find out the expenses of the fund, called the expense ratio.
Bond A bond is a loan to a company or government that pays back a fixed rate of return. It's a more conservative investment than stocks, but still has risks.
WHAT HAPPENED TO MY APPLE? 27 Mutual Funds can be actively managed or passively managed (indexed). Actively Managed Funds Many Mutual Funds have portfolio managers who are constantly buying some assets and selling others in the attempt to “beat the market”. You might just see IJKL on your statement (totally made up, don ’t Google that), but that name might represent a bunch of people who need to be paid to run the fund, plus there are internal expenses from all the buying and selling, sales charges, tax implications, loss and gain and a lot more. Fund expenses can be really low, or they can be pretty high. Passively Managed or Indexed Index mutual funds attempt to reduce overall costs and expenses by tracking the performance of a specific index like the S&P 500 Index—as closely as possible. That's why you may hear people refer to indexing as a "passive" investment strategy. Instead of hand selecting which stocks or bonds the fund will hold, the fund's manager buys all (or a representative sample) of the stocks or bonds in the index it tracks. Who is Managing your Mutual Funds? The above paragraphs were about your individual mutual funds, whether they are actively managed or passive. Again, I’m talking about the choices of funds that you find on your statement. Now we’re going to build on that by looking at your account as a whole. Who is picking your mutual funds etc.? Are you picking
GIANNA CAMPO & ED ORELL 28 them? DIY? Are you getting advice from a fee only investment advisor? Are you working with a broker? DIY Some people LOVE managing their own investments. They might like to do research and make selections, or they might not love it but are intent on minimizing fees so they will choose a company that allows them to select their own mutual funds or investments. I’m trying to stay away from names of individual companies, but Fidelity Investments is on a lot of 403(b) menus and it’s a pretty widely recognizable option where people can choose to pick their own investments. If this is your style, hey, go for it. You may minimize fees by removing the “middle man” and if you are confident in your ability, I would never try to scare you out of that choice. But, most of the people I speak with don’t want to do it on their own, or they are not confident in their abilities, or they just don’t have enough time to do the research. So, they rely on an adviser to help them.
Actively Managed Accounts
With an actively managed mutual fund portfolio inside your 403(b), IRA, or other plan, you get investment advice from a professional Investment Adviser Representative (IAR) or Broker on which investments to pick. An IAR is usually compensated by charging a fee for the advice they give, normally somewhere around 1 2%. A broker is compensated from the sale of the securities they are recommending. This could be a front end
WHAT HAPPENED TO MY APPLE? 29 sales charge, a back end sales charge, an ongoing sales charge, or a combination. What you should know is that neither of these accounts is free. If you have an actively managed mutual fund account you are paying someone to do just that, manage it. It’s up to you to decide if what you are paying is worth the cost. If your account achieves your objectives in good times and manages to protect you from some of the downside risk the market is experiencing in the bad times, it might be very worthwhile. If your account pretty much just mirrors what the market is doing, you might want to ask yourself, “What, exactly, am I paying for?”. If you can’t think of anything you are getting other than a Christmas or Hanukkah Card, might be time to shop around. We will discuss this in more depth in the section “Who Pays You?” at the end of the book.
31 CHAPTER 4 Annuities Before we go any further, let’s put our big girl and boy pants on. As a result of The 403(b) “Clown Car”, you may have preconceived notions about these two 403(b) funding choices, especially annuities. Annuities have gotten a bad rap in previous decades and a lot of that criticism is deserved, but some of it is misplaced. You have to consider where the information you’ve received has come from and how it plays into the narrative. A lot of online information bashing annuities was written by people who sell competitive products. I personally believe some annuities are a great addition to a retirement portfolio. And, there are others, in my opinion, that were poorly designed and offer little benefit to the consumer. I’m going to urge you to put everything you already know or think you know about annuities on a back burner so you can make decisions for yourself. So…what the heck is an annuity? Excellent question, here’s a very brief history. Annuities have been around since Roman times, around 224AD, when the first mortality tables were created. Yeah, people have been buying annuities since before Mt. Vesuvius covered Pompeii in dust. “Annu” is Latin for year. In their most basic form, a Roman would deposit a lump sum of money and in return receive a contractual set of payments from it annually for
GIANNA CAMPO & ED ORELL 32 life. This process of receiving contractual payments for life is called annuitization. What’s important to know about annuitization or turning the lump sum inside your annuity into contractual payments, is that it’s a one time event and it can’t be undone. You can either have access to the lump sum or to the payments, but not both. Many annuity contract owners no longer turn their contracts into annual payments, through annuitization. I’d like to say that most people buy annuities for growth with a degree of protection, but my honest opinion is that most people buy annuities today because that’s what they are being sold, and many don’t really understand them. So, let’s try to understand them a little better. First, all guarantees offered in an annuity are based on the financial strength of the issuing company.
WHAT HAPPENED TO MY APPLE? 33 When you have an annuity, you own a contract between you and an insurance company. Most contracts have surrender charge periods that range between five and 15 years. This period of time that you commit to leaving your money with the insurance company and withdrawals before this time might involve penalties. A Surrender Period is the length of time before you can cancel your annuity without incurring surrender fees, unless a waiver provided by the issuing company is met. Now, I can’t speak for every adviser or insurance agent out there, but it has been my experience that some people who buy 403(b)s that are funded with annuities haven’t been told, or don’t understand, that they are making a commitment and if they break the commitment before the end of the surrender period of the contract they will pay a surrender penalty. Surrender penalty- a penalty you would pay for withdrawing your funds from the contract before your surrender period is up. A percentage of your entire account value as outlined in your contract. So, if you are going to make a commitment to a company or to a product, for any length of time, don’t you want to make sure it’s the best option available to you? This is a great question to ask yourself. Anytime we make a commitment to anything; a new job, a relationship, a workout routine, we generally ask ourselves, “What’s in this for me?”
GIANNA CAMPO & ED ORELL 34 If you have an annuity, I want you to ask yourself: What am I getting in exchange for my commitment to this product and company? The first benefit that all annuities share is that they are tax deferred, but that is kind of irrelevant when we are having a conversation about 403(b)s because 403(b)s, and in fact all Qualified Retirement Plans, (pensions, 403(b)s, 401(k)s, IRAs, etc.) are already tax deferred. All annuity withdrawals from qualified plans (except Roth plans) are subject to ordinary income taxes, and if taken before age 59-1/2, will incur an additional 10% federal penalty. (Please note there are some exceptions to this rule in 2020 and 2021). There are only 3 types of annuities that are found inside 403(b)s. • Fixed • Variable • Fixed Indexed Let’s look over your choices. Fixed Annuities Fixed annuities were created in the 1930s when the depression era investor was looking for a guaranteed way to grow his or her money. Insurance companies gave them that comfort. With a fixed annuity, you get a fixed interest rate every year during your surrender period and that rate usually doesn’t change after your surrender period is over (depending on the product). If you have
WHAT HAPPENED TO MY APPLE? 35 owned a contract since 2009 or earlier, it is likely that the fixed rate on your annuity is a little higher (maybe 3%) than if you purchased your annuity after that time. I’m not telling you that your pre 2009 fixed annuity is “the cat’s pajamas”; I’m just giving you the facts. Pros of Owning a Fixed Annuity: Your principal is protected, and your contract will grow at a guaranteed fixed interest rate every year. When interest rates are high, Fixed Annuities will typically pay higher interest. Cons of Owning a Fixed Annuity: Since interest rates have declined in recent years, fixed rates have declined as well. I can’t imagine anyone being really jazzed about buying an annuity with a 12-year surrender period with a company promising to give them 1.5% interest per year. Variable Annuities Variable Annuities came around in 1952 and were originally introduced by Teachers Insurance and Annuities Association College Retirement Equity Fund (TIAA CREF), which is still a MAJOR player in the 403(b) industry. They were created to give customers the potential for market growth inside an annuity, which had become increasingly more necessary due to a general fear of inflation at the time. When you put money inside a variable annuity you are given two options. The first is a fixed interest option, just like a Fixed Annuity. Any money you put in the fixed interest option of your annuity grows at a fixed rate. You are also not charged any
GIANNA CAMPO & ED ORELL 36 additional fees on this portion of your account. Just like a fixed annuity, this fixed rate is determined by what interest rates are in the economy, but they do tend to adjust, meaning the fixed rate might have been 2% when you bought the annuity, but it is currently set at around 1 1.5%. Your other option is the variable portion of your account, from which you (or your advisor) has a variety of funds to choose from. Yes, the Mutual Funds that we just talked about. In this type of annuity your money (minus the fixed portion) is pooled with the premiums of other annuity holders in investment options called subaccounts, which in turn invest in mutual funds, so the value of your annuity can fluctuate up and down based on the performance of the funds you are in. If your funds perform well, your account value will grow. If your funds perform poorly you can lose money. All of that being said, Variable Annuities are one of the main reasons why many people cringe at the word “annuity”. Why? Some of it has to do with fees. While both fixed and variable annuities have many of the same costs to operate—admin, taxes, death benefit, etc. Variable Annuities are an investment and an insurance product. It’s up to you, the client, to decide if the added costs associated with Variable Annuities is worth the potential for higher returns. Pros of Owning a Variable Annuity: Because your money is invested in mutual and bond funds, your growth potential might be higher than Fixed or Fixed Indexed Annuities. In a great year, your annuity should outperform other types of annuities. Also,
WHAT HAPPENED TO MY APPLE? 37 your original investment amount or contributions are protected from loss in the event that you pass away. Cons of Owning a Variable Annuity: There are typically higher fees due to the investment component of the product as well as fees for mortality (your death benefit protection) and at times there are additional riders that have a cost to them (See Income and Other Riders in the next section). Also, they involve risk and you can lose money. Fixed-Indexed Annuities Around 1994, insurance companies realized there was a market for annuities that protected principal but also had the possibility for greater growth potential than Fixed Annuities, and so Fixed Indexed annuities were born. They are also commonly referred to as just Indexed Annuities. Because they are still in the Fixed Annuity family, Fixed Indexed Annuity owners still have the option of allocating their money to a fixed interest strategy, but today they offer many other strategies as well, all of which use external market indices to benchmark growth. Okay, what the heck does that mean? An external market index could be any number of indices: the S&P 500, the DJIA, the NASDAQ, or many others. Let’s say you purchase an Indexed Annuity with Insurance Company A, which has an allocation that is benchmarked by the S&P 500.
GIANNA CAMPO & ED ORELL 38 You choose to allocate your funds 100% to the S&P allocation. You have a strategy term (in this case it’s one year). At the end of the year the insurance company is going to look at the growth of the S&P 500, where it started the day you bought the contract, and where it is on your anniversary date. If the S&P 500 had a positive return, a portion of the growth will be credited to your account as interest, subject to the limits set by the company, called a cap, spread, or participation rate. If the S&P 500 had a negative return you will get 0% credited to your account. The 0 is important with Fixed Indexed Annuities. A 0% floor, as they call it, means your account will never experience a negative return due to market loss. To help you visualize, imagine you are on the bottom of a set of stairs. Every time interest is credited to your account you go up another stair. The stairs will all be different sizes, because sometimes you will have a larger gain and sometimes a smaller gain, or none at all, depending on how the external indices perform and what the interest rates of your contract are. However; once you go up a stair, that new level becomes your floor. Your interest earned is locked in, your stairs only go up and never down. If there is a negative return in the external index you stay on the same stair. You will never get a statement that is less than your previous statement, unless you are paying for an additional rider (see Income and other Riders in the next section) or unless you are taking money out of your own account.
WHAT HAPPENED TO MY APPLE? 39 Lots of options: In recent years a lot of Indexed Annuities have included index options from which to choose when allocating your money. Your plan might have an option that looks at the S&P 500, another that looks at the NASDAQ, one that looks at a Barclays index, and three more. You can generally make changes or reallocate to different strategies every year (or number of years, depending on the strategy you’ve chosen). Beware of strangers bearing gifts: Many companies offer upfront bonuses when you purchase a contract. I have nothing against bonuses. I like free money as much as the next gal. My warning is, never buy an annuity simply because of the bonus. There are some great annuities with bonuses and then there are those that will lure you in with a big, fat, juicy bonus, and your growth potential from that point on could be less, or you may be required to follow specific rules in order to truly receive the bonus. In addition, bonus annuities often involve lower caps, higher spreads or lower participation rates. I repeat, work with an adviser that understands these products, or you could make a mistake. Pros of Owning a Fixed Indexed Annuity: If the external indices that your Fixed Indexed Annuity use to benchmark the growth of your account perform well, you could have higher interest credits than a fixed annuity would give you. It’s not uncommon for some plans to have multiple double digit returns in a ten year period. Also, Fixed Indexed Annuities often come with optional riders to create lifetime income, increased death benefit, and increased liquidity, (See my explanation of Income and Other Riders in the following section).
GIANNA CAMPO & ED ORELL 40 Cons of Owning a Fixed Indexed Annuity: Your growth potential in a Fixed Indexed Annuity is only as good as the rates of the contract. If the rates in your annuity don’t allow for very much growth, then you might be better off in a different product. Reach out to one of our advisors to help you better understand your annuity and the guarantees/growth potential it provides. Income and other Riders First, what’s a Rider? As the name implies it’s something that rides with you on your journey. In this case it’s something that you pay for (in most cases) that adds an extra benefit to a policy or plan. There are riders on annuities that create guaranteed income, additional income in the case of sickness or need for long term healthcare, additional death benefit, additional liquidity, additional growth potential,
WHAT HAPPENED TO MY APPLE? 41 and many more. But the ones we see most in the 403(b) world are income and sometimes additional income in the case of sickness or need for long-term healthcare. Income Riders Since the original purpose of an annuity back in Roman days was to create income, it’s not really surprising that creating guaranteed income is a big function of annuities today. Many companies sell annuities that are offered with income riders. This is something you pay for, that offers you guaranteed growth on your money, for the purpose of turning it into an income stream at a later date. I’m not going to go into a lot of detail here because income riders vary from company to company, but these are the things you should be aware of: • Income riders can be a great way to turn a lump sum into an income stream that you cannot outlive. • Income riders vary from company to company and annuity to annuity, so be sure that you have one that is appropriate for your needs. For example, if you are planning to take income in three years there would likely be a different/better annuity for you than if you were planning to take income in 15 years. • Income riders have a cost! Usually around 1% of your total account value per year. • I believe many people (and this may include you) have been sold income riders without having them properly explained.
GIANNA CAMPO & ED ORELL 42 Before I go on, I’m not knocking income riders at all. I believe in them, and if sold appropriately I believe they can make a massive difference to retirement income. However… About once a week I speak to someone who has been convinced they are getting “guaranteed 6% on their money”. If you are reading this now and thinking, “She might be talking about me”, then I apologize, I probably am talking about you. When I hear this, I have to explain that the “guaranteed 6%” is the guaranteed growth on your income rider value and not the growth of your actual account value. This means you need to take income from the income feature of your annuity as described in your annuity to actually realize this higher value. If you surrender your annuity for cash, the value you receive will not have realized this 6% increase from year to year. We encounter this misunderstanding all the time, and in my opinion, it’s often because the feature was misunderstood by the client or misrepresented by the agent who sold it. If you are actually getting guaranteed 6% on your account value, then you most likely bought it in the 1980s and I suggest framing your policy pages and putting them on your wall in a place of honor. If you think you are, you probably are not, unfortunately. Either way, if you give us a call, we can help you figure out what’s going on. Income riders are available on Fixed Indexed Annuities inside 403(b)s, depending on the company and product you are talking about, and they may (or may not) be available on Variable
WHAT HAPPENED TO MY APPLE? 43 Annuities inside 403(b)s. In my years in this role I have only seen a handful of income riders on Variable Annuities that were 403(b)s. However, I very frequently see income riders on Variable Annuities that are not 403(b)s, like IRAs and Non Qualified accounts. Wrapping up Annuities I apologize if any of that was confusing. Annuities are complicated products and I believe they are often sold to people who have a limited understanding of what they are and how they work. To make things worse, they are sometimes sold by people who have a limited understanding of what they are and how they work. At the same time, a lot of annuities, at least the good ones, can be great products that minimize human error.
45 CHAPTER 5 Risk Up to this point we have gone over two types of financial products that can be risky: Mutual funds have market risk and bond funds have interest rate risk. Variable Annuities have risk if they contain mutual funds and bond funds, though they do have an option for putting some of your assets in a fixed allocation. Fixed and Fixed Indexed annuities have less risk. Though all annuities; fixed, fixed indexed, and variable, carry underlying risk associated with the credit worthiness of the company. I personally have no problem with risk inside investments. I don’t have a problem with people skydiving either, though I think people who skydive are usually pretty aware that they are about to jump out of a plane. I don’t always think that’s the case with participants who own market based retirement accounts, whether they are Mutual Fund Accounts or Variable Annuities. You should be highly aware of the risk inherent in your assets, whatever that is. You can make a lot of money in a market based product, and you can also lose a lot of money in a market based product. You should be aware not only of how much risk you are “comfortable taking” which is the standard way of assessing risk, but also how much risk you can “afford” to take, and most importantly, you should have an awareness of what you need
GIANNA CAMPO & ED ORELL 46 this money to do for you in retirement. Do you need it to create income? Do you want it to be a “rainy day fund”? Do you want to leave it to the kids? Your awareness of what you want the money to DO should influence your decision/preference on risk. As people get older and closer to using their money, most look for ways to minimize their downside risk. If you bought a product 20 years ago and that product is still set to an extremely aggressive allocation, but you are a year from retirement, you could wake up one day wondering where your parachute is. Reach out to us for a risk assessment of your current retirement plan.
47 CHAPTER 6 Observations & Opinions This has been my attempt to clarify some of the confusion, but I admittedly cannot do it without some injection of bias. It’s important to understand that the personal experiences of your adviser often filter the lens with which they speak to you about financial products. I’m not specifically advocating one particular type of investment or product here. I have a license that requires I act in my client’s best interest and I take that responsibility very seriously. But I’m also human, and that means I come with opinions and experiences that are unique to me. So, here are some of my opinions. I am neither for nor against risky investments. However; I happen to be a pretty risk averse person. So, if you tell me you are looking to minimize risk or you do not have time to recover from significant loss, I am more inclined to recommend conservative products to you. If you enjoy taking risk and have a longer time horizon, I will give you advice that is based on past performance and reasonable expectations in regard to gain and risk. Mutual Fund accounts can be risky or less risky depending on the allocations inside your account. They can also be expensive or less expensive depending on which funds you choose and who you choose to advise or manage that account.
GIANNA CAMPO & ED ORELL 48 In my opinion, Fixed Annuities are only as good as your guaranteed rate. 3% is a pretty common fixed interest for annuities purchased before 2009. 3% seems okay relative to current interest rates, but it’s not really anything to write home about. I have seen fixed rates of 4% and 4.5%. If you have an annuity with a 4% or 4.5% fixed interest rate, that’s a pretty darn good rate. Explore all your options before moving, changing, or buying a new one. I am obviously not a big fan of Variable Annuities, but I asked you to put your big girl/boy pants on, so I have to put mine on too. I’ll say that Variable Annuities usually have lower fees inside 403(b)s than outside 403(b)s, like in IRAs or Non Qualified accounts. That’s not an endorsement. It's me trying to give a product, that I do not like, the benefit of the doubt. Also, if you’ve had a Variable Annuity for a long time, you might have a decent fixed rate accessible to you. Again, I’m talking about 4% or 4.5%. Older contracts sometimes have these rates. However, some companies will limit the amount of money you are allowed to allocate to a fixed account to reduce market timing. That means you might have a fixed rate available to you, but you cannot allocate all your money to the fixed rate at one time, even if that’s what you want to do. Like everything else, my warning is to explore all your options before moving, changing, or buying a new one. Why do I dislike Variable Annuities?
If your intention is death benefit, you should consider life
Some companies (not all) make it extremely difficult for clients to
If your intention is safety, there might be options that offer more
WHAT HAPPENED TO MY APPLE? 49
don’t think clients should have to fight with anyone in order to move their money once they have decided to do so. Bottom line, I don’t see that Variable Annuities do growth, protection, income, or death benefit particularly well. And yet, I would say roughly 50% or more of the people I speak with own them. Fixed Indexed Annuities are often a better choice, in my opinion. They can be a good fit IF, and these are big IFs, you are in a good product, and IF it meets your needs and objectives. But, I repeat, Fixed Indexed Annuities are only as good as the company you
If your intention, as the client, is growth, I believe if you were to search elsewhere there are products that could offer the same or more growth and eliminate some of the fees. protection and higher upside potential, depending on the stronger income guarantees. insurance. Maybe the biggest complaint of all is this: move, transfer, or roll over their accounts. To the point where you almost have to fight with them, which leaves many clients asking, “Whose money do you think this is? Mine or yours?” I
choices within your employer’s plan. If your intention is income, other types of annuities usually have
GIANNA CAMPO & ED ORELL 50 select, the features the annuity offers, and the interest rates allowed by the product you are purchasing. I’ve seen some Fixed Indexed Annuities that have been sold inside 403(b)s that have very low rates/caps etc. To make things worse, I think they have often been improperly sold with Income Riders that have a cost to them and reduce the net gain of a product that already has low growth potential. To their credit, most companies that sell Fixed Indexed Annuities are constantly improving their products to be more competitive in the marketspace. As with Variable Annuities, you should never buy something just because it’s the only thing the person sitting across the table from you sells. Like all the other types of annuities, I’m going to suggest you explore all your options before moving, changing, or buying a new Fixed Indexed Annuity. What I’d like to see on Your Menu Remember a few pages ago when we talked about your school or district’s Menu? Here, in my opinion, is what every district should have on its menu. If you don’t know how to find your menu, this info can be provided by your school district, University, or your Third Party Administrator (TPA). The TPA is the keeper of the keys and manages the transactions from one company to another, withdrawals, loans, and rollovers out of the plan. If I could wave a magic wand, every school and district in the country would add these two options to their menu if they do not already have them:
EVERY DISTRICT and UNIVERSITY. You have a right to have
In short, I think the decision as to which companies are allowed to be on your 403(b) Menu should not be made by committees behind closed doors. I think it should be a public process and I believe safe and inexpensive choices need to be represented in
WHAT HAPPENED TO MY APPLE? 51 • At least one or more companies that offer Fixed Indexed Annuities with and without income riders. If you have access to a good product line, Fixed Indexed Annuities can be a good choice for people who are risk averse but still want a chance at market like returns—and a lot of school employees are risk averse. • At least one firm where you can either pick your own investments (DIY) or work with an advisor of your choice. I mentioned Fidelity Investments earlier because they are already on many school districts’ Menus, but they are not the only choice. How can you add companies to your menu? Well, this one is tricky. You see, school districts are in many ways just like corporations. There are 67 counties in Florida and 67 school districts. They are massive! Some are so big they have budgets larger than small countries. Pennsylvania too has 67 counties, but each of those counties contains multiple school districts, and that state has around 500 districts in total. It’s easier to move the needle at the level of a small business than at the level of a small country. There are some places in the country where you could and simply ask for a company to be added to the plan and it would be done, and others where you would need to wait several years for the district to go through a formal evaluation or reevaluation process.
GIANNA CAMPO & ED ORELL 52 companies on your 403(b) platform that reflect the needs of the collective whole.
53 CHAPTER 7 When You Can Get Out of Dodge It’s extremely important to know that if you are in a personal 403(b), meaning no employer contributions, and often 401(k) depending on your employer, you can often move your assets out of an employer sponsored plan and into an IRA when you sever service from your employer or reach the age of 59.5. If you are in a plan that you don’t like, you should have this date marked on your calendar, keeping in mind that my recommendations might change depending on the situation and other factors including surrender penalties. Why might you want to consider rolling your money out of a 403(b) after 59.5? Well, if you had optimal options within your 403(b) Plan, I guess you might not, but that’s not currently the case everywhere. So, 59.5 might be your first chance to pick a plan that better suits your specific needs.
Example: I’m working with a client who is 57 years old and plans to work until he is 67, which is his full Social Security age. He has 20 years of service with his current school district. About 15 years ago, he took some terrible advice and moved his money out of the defined benefit plan (pension) and into the defined contribution plan (investment plan). It was terrible advice because what the guy really needs in retirement is guaranteed income! And aside from Social Security he does not have any. He’s been a good saver though, and has about 100k in a 403(b), but his district does not have any options that would create guaranteed income. If this client was 59.5 or older (or had
GIANNA CAMPO & ED ORELL 54 severed service from his employer), he could look into rolling that 100k into a plan that suited his needs, specifically income. But since he’s not that age yet, unfortunately he has to wait another 2.5 years to put a plan in place that he can feel confident about. Side note: 457(b)s often do not allow withdrawals until you sever service or are 70.5, so there is far less portability with those plans. Help! I don’t have a 403(b). I have something else… There are a lot of different types of retirement plans and it’s hard to cover the minutia without sounding like Ben Stein. We are not covering all of them, just the ones we see most frequently. You can consider this extra credit. I’m going to breeze through them and then recap in a way that might help you put it all together. Note: we’re only talking right now about the elective ones, the plans you started on your own, or with the help of somebody like Cliff. But first…
WHAT HAPPENED TO MY APPLE? 55 Our good old Uncle Sam is going to help us with the next part, because taxes are kind of important when we discuss tax codes. We have two categories here. We’ll start with: Traditional A traditional plan is one where contributions are made pre-tax. Traditional plans reduce your taxable income now; you do not pay taxes on the money you contribute to your plan in the year you contribute it. But, since you have not paid taxes on any of this money, and come on, Uncle Sugar isn’t going to let you get away from that forever, you have to pay taxes on this money
GIANNA CAMPO & ED ORELL 56 when you take it out of the plan. At that time, it will be taxed as ordinary income. If you have not touched any of the money inside your plan by the time you are 72 (formerly 70.5), Uncle S makes you start taking withdrawals annually from your plan. This is called a Required Minimum Distribution or RMD. There are tables to tell you exactly how much you have to withdraw, but it starts at just under 4% and goes up from there as you get older. If you don’t take out your RMD each year, the IRS will penalize you 50%--yes 50% of the funds you should have taken out but didn’t. There are a lot of people who really don’t need to use their traditionally saved money in retirement—and yet they have to start taking the 4ish% every year. Some ask, “What do we do with all this money?” It makes me think of the 1998 hit by Semisonic, Closing Time that goes like this, “Closing time, you don’t have to go home, but you can’t stay here.” The IRS doesn’t care what you do with the money. Go on a trip, remodel the kitchen again, open up a different type of plan and dump the money in there after you’ve paid the taxes. Point is, they make you start taking it out, whether you want to or not. This applies to all of the following except Roth IRAs. 403(b) 403(b) is the most common type of tax code we see inside K-12 and Universities. While you are working you have to choose a provider from your employer’s Menu. You can usually move your funds out of the plan once you have severed service (no longer working there) or you are the magical age of 59.5.
WHAT HAPPENED TO MY APPLE? 57 401(k) Every once in a while, we work in a school district that has a 401(k) option in addition to its 403(b) and 457 plans. This isn’t necessarily a bad thing. 401(k)s sometimes have lower plan expenses than 403(b)s. The little hiccup with a 401(k) is that there is usually only one option. It’s as if they brought you out a menu that had one Daily Special on it. Like 403(b), you can usually move your funds out of the plan once you have severed service (no longer working there) or you are the magical age of 59.5. 457(b) 457(b)s or just 457s were created for government workers, so this applies to many K-12 and some university workers as well. Much is the same as a 403(b) and you have to pick a provider from the menu. A big benefit to a 457 is that IF you retire before full retirement age of 59.5 and you want to access some or all of your money, you will not pay the 10% early withdrawal penalty that you would pay with most other types of plans. This is what makes them good plans for firefighters and police officers that often retire earlier than other types of workers. The not so great part of 457s is that you don’t actually own them, your employer does, and you often can’t move your funds out of the plan until you have severed service (no longer working there) or you are the magical age of 70.5!
GIANNA CAMPO & ED ORELL 58 IRA Okay, Individual Retirement Accounts or IRAs are not employee sponsored plans, but a lot of people have them. You can run out and start yourself an IRA today, with any company you want, but you can ’t contribute anywhere near as much as you can with your employer sponsored plan. You own your IRA, and you can decide at any time what you want to do with it; change plans, change advisors, cash it in…however, if you are under 59.5 you will pay a 10% penalty for taking the money out before you are technically old enough. IRAs are usually the “catch all” for all other types of plans, meaning if you were to leave employment with a 401(k), a 403(b), and a 401(a), you could combine them all into your IRA. Since this money is already pre tax it can go right into your IRA and the event is non-taxable. Post Tax or Roth With Roth plans you pay Uncle Sugar before the money goes into the plan. These plans do NOT give you a tax break when you contribute to them, but the money does grow tax deferred and when you take the money out in retirement the money come to you tax free! Yay! It’s a personal choice as to whether Traditional or Roth is a better fit for your financial picture. Roth IRA Roth IRAs work pretty much the same way as traditional IRAs. The contribution limits are the same as traditional IRAs, and significantly less than what you can contribute to an employer
59 sponsored plan. Provided five years have passed since your first contribution to the account and you are over 59.5, you do not have to pay any taxes at all on the money coming out of this account. If your income is above a certain level, you cannot contribute at all to a Roth IRA.
WHAT TO MY APPLE?
Roth 403(b) Roth 403(b)s are almost exactly the same as traditional 403(b)s. You have to pick off The Menu, and you can roll into a Roth IRA when you sever service or turn 59.5. The only difference is that like Roth IRAs, you pay your taxes on the money now, so you do NOT have to pay taxes later, provided you have followed the rules. The song Closing Time does apply to Roth 403(b)s though. Even though you ’ ve paid your taxes you do have to take RMDs from Roth 403(b)s. I often suggest clients roll a Roth 403(b) into a Roth IRA when eligible, 59.5 or older, to avoid this problem.
HAPPENED
61 CHAPTER 8 Who Pays You? It’s pretty common that someone asks an advisor, “How do you get paid?” or “Who pays you?” Those are extremely valid questions, which I don’t mind answering. Though, if I’m being honest, I hate answering that right off the bat before I’ve asked you a single question. Why? Because, the answer is complicated. Here’s the truth. I’ve spent years becoming very well versed in several pension systems, and I will always answer your questions, regardless of whether I see an opportunity for us to work together. My partner and I operate our own company on this principle. We don’t work for one specific insurance or investment company. So, the short answer is nobody is paying us to talk to you. You are not paying us for our conversation, and no, we do not work for your district or state. We do not work for an hourly wage. We try to always approach our interactions with clients with a sense of optimism, and we enjoy a good laugh. Personally, I can receive a fee for giving investment advice, I can also show you insurance products that you might want to buy, and if you do the company you choose to purchase a product from will pay me a commission.
A Note About Everything I Left Out
I haven ’t covered everything in terms of retirement, and I didn ’t even scratch the surface of investments. Whether on your own before you are 59.5, or if you are approaching retirement, you should know there are virtually unlimited options for investing that were not mentioned here; investments such as commodities, real estate, REITS, crowd funded investments. You name it, you can buy it. None of those investments are mentioned in this book. What I tried to do here was give you a brief summary of what I ’ ve learned working with approximately 20 new district and upper education employees per week, 50 or so weeks a year, for multiple years. Yes, I have my opinions, they are an unavoidable part of being human. But I take fiduciary responsibility very seriously, and I feel that unscrupulous sales practices and just plain lack of information about plans and products is a giant failing in the public employee space. I ’ m here to say it ’ s not your fault. I tell my clients this all the time. I would have a hard time doing your job for a day, let alone 30 plus years, and I wouldn ’t expect you to understand mine from a 15 minute conversation with a 403(b) Rep named Cliff in a breakroom. What I do know is many of the state pension systems have valuable information on their websites, and the reps who work the phones are knowledgeable and there to serve
63 CHAPTER 9
Gianna Campo and the PRES Financial (Public Retirement Exit Solutions) Family PRES Financial is located in Wellington Florida and co founded by Gianna Campo and Ed Orell. We offer live and virtual retirement
I ’ ve been wanting to write this short book for several years, but I ’ m happy that I didn ’t write it until now, as my knowledge base continues to grow with every new person I see or speak to on the phone. I ’ m not some fast talking, slick, financial salesperson trying to fit your needs into a predetermined solution. Your needs are highly individual, and your solutions should be as well.
At heart I ’ m an Italian American girl from New Jersey, which obviously means I love food, but more than that it means I love family. I consider you to be part of my family and I would like you to be treated as such. I think you should have an apple on your desk every day and you deserve sound advice while working, and damn, when your time comes, you deserve to retire with dignity.
GIANNA CAMPO & ED ORELL 64 you. Your contributions pay for their services, so you should never feel embarrassed to reach out to them and ask your questions, nor should you feel uncomfortable calling your 403(b) or other plan providers and asking them about fees, rates, caps, and really anything else you don ’t understand.
A Shiny New Apple
From the bottom of my heart, I thank you for your tireless devotion to our children and to our world.
WHAT HAPPENED TO MY APPLE? 65 advice in all 50 states and have financial representatives available in English and Spanish. We are a financial services firm offering retirement planning services using insurance products. To Contact PRES Financial: Phone: 877-216-9573 Email: info@presfinancial.com Website: https://www.presfinancial.com/ Gianna Campo is an Investment Advisor Representative offering advisory services through Verity Asset Management, A Registered Investment Advisor. Verity Asset Management and PRES Financial are not affiliated companies. Nothing in this publication is an offer to buy or sell securities. Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation. We are not affiliated with any US, state or local government or Teacher ’ s association. Investing involves risk, including possible loss of principal. Insurance and annuity guarantees are backed by the financial strength and claims paying ability of the issuing company. Annuities and Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods.
